Insider Trading Blights Takeover Deals

June 11, 2010

Almost a third of the takeovers on the London Stock Exchange last year were preceded by suspicious share price movements, suggesting insider dealing or other market abuse may have been taking place, the City watchdog said yesterday.

The Financial Services Authority (FSA) said analysis of the 144 takeover announcements made to the Stock Exchange last year had uncovered "abnormal pre-announcement price movements" in 30.6 per cent of cases. That was the highest figure since 2004.

While the figures do not prove that financial crime has increased, the regulator said the figures were worrying. Its annual report, in which the data was revealed, said: "They could show that the market abuse is too high and [we] are strongly committed to considering if there are actions that we could take to reduce them."

The data is likely to embarrass Hector Sants, the chief executive of the regulator, who has insisted that the FSA has become a much tougher watchdog since the financial crisis three years ago, when it was accused of having been asleep at the wheel.

Yesterday, Mr Sants pointed out that the regulator had hired 537 new members of staff for its supervisory departments since April 2008 and claimed "improvements in our market abuse and insider-dealing detection and investigation capability".

However, while there have been a string of high-profile dawn raids relating to insider-dealing investigations in recent months, the FSA has secured only two criminal convictions over the past year, with a third trial producing not guilty verdicts on all the defendants.

Though criminal proceedings have been launched in four other cases â and other investigations may yet bear fruit—the FSA has faced criticism for its failure to bring more financial criminals to justice. Since coming to power, the Government has said it will create a single agency with responsibility for tackling all white-collar crime, amalgamating the powers of the FSA, the Serious Fraud Office and the Office of Fair Trading.

Steve Nash, head of the takeovers team at Eversheds, the City law firm, said the FSA's focus on financial crime was having some effect, but that there was more work needed.

"Insider dealing may not be quite as prevalent as the statistics suggest because there are all sorts of reasons for suspicious share price movements," said Mr Nash. "But one would expect these statistics to be falling if incidents of insider dealing were coming down." In fact, the proportion of deals preceded by odd share price movements has risen in each of the past four years.

There is also some suspicion in the City that the FSA has chosen to target softer targets as it attempts to show it has responded to criticism of its role in the financial crisis, fining companies that it supervises ever greater sums. Such cases have a lower standard of proof than is needed to secure criminal convictions.

The FSA's total fines last year exceeded Â£33m, a record. This year's figure is certain to be even higher because the regulator has already issued JP Morgan with a Â£33.4m fine for failing to safeguard clients' money.

"In order to secure attention, fines, like medicine, have to be administered in ever larger doses," said Simon Morris, a lawyer at CMS Cameron McKenna, who said the penalties might be aimed at George Osborne, the Chancellor, who is due to announce further losses of power for the FSA next week.

Adair Turner, the FSA's chairman, defended the regulator's record yesterday. "The measure of the effectiveness of our new regulatory and supervisory approaches will be whether in five or 10 years' time potential problems are prevented, either within individual firms or across the whole financial system," he said.